South African Business 2021

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FOCUS Ready to get behind government’s ambitious infrastructure programme Jason Lightfoot, Portfolio Manager at Futuregrowth, explains how private capital can be mobilised to support infrastructure projects. In a world in which the government and central bank have several means available to stimulate the economy, infrastructure spend is a powerful anti-recessionary fiscal policy tool. However, in South Africa economic growth has been constrained by lower levels of investment in infrastructure than in other developing economies, which has been exacerbated by specific issues such as ageing infrastructure and infrastructure bottlenecks. The Covid-19 crisis and the fiscal support needed to alleviate the damage done to businesses and the most vulnerable citizens as a result of the lockdown could also put the government’s future infrastructure ambitions at risk. The extent of infrastructure spending in an economy is reflected in the level of gross fixed capital formation (GFCF) as a percentage of Gross Domestic Product (GDP). The measure captures how much money as a proportion of total economic activity is being invested in capital goods, such as equipment, tools, transportation assets and electricity and various measurable outputs of these. South Africa’s reported GFCF has been historically low, with the exception of the build-up to the FIFA World Cup in 2010. Latest statistics show GFCF as a percentage of GDP was 18.19% in 2019, which is considered far too low for a developing economy. Several studies consider an acceptable norm to be in the region of 30% to 35% of GDP. South Africa’s GFCF ratio also has some way to go before it will achieve the target in the government’s National Development Plan of 30% by 2030. While assessing this, it is important to note that a country’s current debt level does have a bearing on its ability to fund infrastructure initiatives – and South Africa’s government debt burden doesn’t bode well for the country’s infrastructure funding capacity. When you include guarantees to State-Owned Enterprises (SOEs), the government’s debt-to- GDP ratio is expected to rise to well above 100% compared to the average emerging market level of around 45%. A debt-to-GDP level of more than twice as large as the average emerging market means that the South African government will have very little scope to fund large-scale infrastructure and developmental initiatives and thus the burden will fall elsewhere. Although there are historical reasons for this high debt-to-GDP burden, the government’s finances have also been stretched by the social and economic measures it has needed to put in place to alleviate the economic fallout from Covid-19. A fiscal rescue package of R500-billion will add to the already high debt burden and economic lockdowns have already resulted in lower levels of revenue generation, putting the government in a difficult position fiscally. If the environment is right, private investors are ready Banks, as well institutional investors, are no strangers to fulfilling a funding role but have become more apprehensive about doing so, given the government’s governance, financial and operational SOE failures. While the various developmental finance institutions need to fulfil a specific role when it comes to industrial policy, economic development and providing credit-enhancing capital, capital market players need to have confidence that the policy environment will remain stable and that potential investments will offer sufficiently attractive risk-related returns. To a great extent, the Renewable Energy Independent Power Producer Procurement SOUTH AFRICAN BUSINESS 2021 24 42
FOCUS Programme (REIPPPP) met these criteria, enabling the private sector to play an important role, committing about R200-billion to the programme to date. REIPPPP is seen as an important success story, particularly in respect of the impressive implementation role that the Independent Power Producers Office played in that programme. Unfortunately, the success of this programme has not been emulated in other sectors and there hasn’t been a coordinated approach to address the other necessary infrastructure investments until now. That may change with the Investment and Infrastructure Office set up by President Cyril Ramaphosa. The government gauged private sector investment appetite recently when it presented various project pitches for various sectors deemed a priority to the broader market, as a precursor to the inaugural Sustainable Infrastructure Development Symposium of South Africa (SIDSSA). Sectors the government has identified as in need of infrastructure investment include energy, digital infrastructure, water and sanitation, human settlement, agriculture and transport. The government’s latest engagement with the private sector is a step in the right direction. It crowds in potential private sector investors in a much more coordinated manner and includes them in assessing how these various initiatives can be funded. It is encouraging that the government is engaging with capital market participants during the conceptual stage of some of these projects because it will allow concerns to be addressed earlier and thereby potentially ensure a much higher success rate. Breaking out of SA’s low-growth trap Although the range of projects is wide, there are several significant ones that could change the South African landscape to the benefit of all. From a digital perspective, infrastructure investment in broadband fibre connectivity could provide peri-urban (townships) and rural communities, which have been traditionally underserviced, with affordable access to broadband connectivity. The infrastructure initiatives under consideration could be important contributors to getting South Africa out of its current low-growth trap. Although the estimated R1.5-trillion needed to fund the projects over the next decade is a tall ask, the private sector is ready to fund them as long as they are well structured and managed, that investors are compensated for the risks that they are taking and that they ultimately have policy certainty. Futuregrowth is an investor in the Khobab Wind Farm. Futuregrowth Futuregrowth has been a long-standing institutional investment partner in infrastructure and developmental finance, funding projects for close on 24 years. It manages the largest debt fund of this nature in Sub-Saharan Africa, the Futuregrowth Infrastructure and Development Bond Fund, which has a market value of more than R15-billion. It has funded various transactions over the last two decades to the benefit of all South Africans – and will continue investing in projects that provide the impetus the domestic economy needs to lift its economic growth rate to sustainable levels in the future, while earning riskadjusted returns. ■ FUTUREGROWTH ASSET MANAGEMENT IS A LICENSED FINANCIAL SERVICES PROVIDER 43 SOUTH AFRICAN BUSINESS 2021 25 SOUTH AFRICAN BUSINESS 2021
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Page 15 and 16: 10 REASONS WHY YOU SHOULD INVEST IN
Page 17 and 18: SANSA provides stateof-the-art grou
Page 19 and 20: SPECIAL SPECIAL FEATURE KwaZulu-Nat
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Page 23 and 24: Gert Sibande District Municipality
Page 25: SPECIAL FEATURE Special Economic Zo
Page 29 and 30: FOCUS LEDET MEC Thabo Mokone, MMSEZ
Page 31 and 32: FOCUS Artistic Impression of the MM
Page 33 and 34: FOCUS Developing small towns into c
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Page 37 and 38: coastal areas and communities where
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Page 42 and 43: OVERVIEW Agriculture Berry producti
Page 44 and 45: INTERVIEW Crafters and knitters are
Page 46 and 47: OVERVIEW Mining Exploration is the
Page 48 and 49: OVERVIEW to 2045. Venetia Mine is b
Page 52 and 53: CREATING LASTING LEGACIES By: Caspe
Page 54 and 55: FOCUS World-class zinc operation in
Page 56 and 57: FOCUS Showcasing Ivanhoe’s educat
Page 58 and 59: OVERVIEW Energy Solar and wind proj
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Page 67 and 68: FOCUS Petroleum Agency SA: promotin
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Page 71 and 72: FOCUS Mr Siyabonga Makhathini, the
Page 73 and 74: OVERVIEW Sector news Expansion at B
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OVERVIEW Johannesburg in 2019 where
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FOCUS THAT’S IN OUR NATURE. conta
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OVERVIEW in SA), increasing local c
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OVERVIEW Coal tonnage reached 72mt
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OVERVIEW Mpumalanga and Durban’s
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CPD CONTiNUOUS PROFESSiONAL DEVELOP
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FOCUS Coega Development Corporation
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48669 More choices. More opportunit
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